The next target zone appears highly probable as we continue to try and think two moves ahead of the market.

In Wednesday's update, we examined the evidence for the bull and bear cases and concluded that the S&P 500 (INDEXSP:.INX) would rally over the near term, but that bears had the edge to see new lows over the intermediate term. The near-term upside targets were 1860-65, then 1870-74, while 1874 was noted as a key pivot. Both upside targets were captured during Wednesday's session. On Thursday, SPX reached an early session high of 1872.53, a point shy of the pivot, before being crushed by an onslaught of sellers. It has now reached new lows, but there are no indications yet that the decline is over.

I expect a trip into the second downside target zone (1822-28, as published April 7), and odds are reasonable that we'll ultimately see even lower prices.

It seems like suddenly everyone has jumped on the bear bandwagon -- and that always makes me inclined to stay on my toes for an unexpected rally, since the market "wants" to inflict pain on traders who are late to a party. Nevertheless, there are no technical signals yet for a rally, but the first thing I'll be watching this session is the new crash channel in SPX. A little later, we'll also examine some ways the market might make things harder on the newly converted bears.

Let's take a look at the Nasdaq Composite (INDEXNASDAQ:.IXIC) and also revisit a paragraph from Monday's update:

As I noted on Friday, the higher beta indices like COMPQ and Russell 2000 (INDEXRUSSELL:RUT) weren't playing along with the SPX rally. That's sometimes a warning that sentiment is shifting toward risk-off. Looking forward, COMPQ's current pattern has a markedly bearish appearance and is suggestive of a nested third-wave decline ("nested" meaning a third wave within a third wave). This chart tells me I'm not in a hurry to "buy the dip" just yet, because there's still significant downside potential present.

As of this moment, there has been nothing to negate that nested third-wave potential.

So the nested third wave remains alive and well and speaks to waterfall potential. And yet, as I mentioned earlier, I'm bothered by all the Johnny-come-lately bears. I approach the market a bit like I'd approach a chess match, which means I try to think several moves ahead of my opponents. I try to express those strategies as best I can in these updates, while at the same time trying not to overwhelm and confuse readers. Frankly, my approach is a lot simpler in real-time, since as the market moves, it often reveals itself rather plainly.

In any case, I want readers to be aware of a couple of additional "chess match" moves the market may make here so that readers can stay ahead of their opponents as well.

One of the questions I indirectly raised earlier is: "How might the market punish the newly converted bears?" There are, of course, no guarantees that it will, but it's a strong possibility. So, instead of cluttering up the SPX chart, I've used the NYSE Composite (INDEXNYSEGIS:NYA) to illustrate two possibilities for market curveballs.

The first curveball potential is a surprise intermediate bottom in wave C. C-waves typically reach approximate equality with A-waves, as shown by the green measured-move boxes on the chart below.

The second curveball potential is for a quick drop that captures the SPX target 2 zone, which is followed by a retracement rally (to punish the new bears). I've shown this option in black on the chart below -- if this plays out, expect SPX to follow a similar path. Note there is absolutely no technical reason for me to consider such an outcome; this is merely based on trying to determine what might cause the greatest amount of pain to both the bulls and the bears at the current juncture. The black path would also leave the greatest number of options open, which is another thing the market often likes to do.

Once again I'd caution readers to watch the crash channel on SPX and thus not entertain these other options as long as SPX remains within that channel.

In conclusion, it's likely that SPX will capture the second target zone of April 7, and it presently appears to be reasonable probability that the decline will ultimately continue beyond that zone. Considerable downside potential remains in the current patterns, and until bulls do something to negate that potential, this market continues to warrant a cautious stance. Have a great weekend, and trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of it: @PretzelLogic.

No positions in stocks mentioned.

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